Stock Analysis

Is Melexis (EBR:MELE) Likely To Turn Things Around?

ENXTBR:MELE
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Melexis (EBR:MELE), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Melexis, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.20 = €76m ÷ (€433m - €54m) (Based on the trailing twelve months to December 2020).

So, Melexis has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Semiconductor industry.

Check out our latest analysis for Melexis

roce
ENXTBR:MELE Return on Capital Employed March 1st 2021

Above you can see how the current ROCE for Melexis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Melexis here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Melexis, we didn't gain much confidence. Around five years ago the returns on capital were 42%, but since then they've fallen to 20%. However it looks like Melexis might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Melexis is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 127% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Melexis you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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